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Court Case May Help Financial Advisors Clean Up BrokerCheck Records

November 8, 2012
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Joelle Simms

As those in the financial industry are keenly aware, the Financial Industry Regulatory Authority (Finra) has made concentrated efforts over the past few years to increase public disclosure of information relating to financial advisors and to make this information more accessible to investors through BrokerCheck. What those in the financial industry may not be aware of, however, is that this increased disclosure and access may actually help financial advisors rid their BrokerCheck records of unwanted blemishes.

In today's litigation-happy world, brokers increasingly find their records spotted with customer complaints. While Finra provides certain procedures for disputing this information, until recently, it has been largely accepted that financial advisors could remove customer complaint information from their Central Registration Depository (CRD) and BrokerCheck records only under three specific circumstances outlined in Finra Rule 2080:

(1) where the claim, allegation or information is factually impossible or clearly erroneous;
(2) where the broker was not involved in the alleged conduct; or
(3) where the claim, allegation, or information is false.

As those in the industry are well aware, however, inaccurate or otherwise unjustified customer allegations do not always fall neatly within these descriptions. As a result, there has historically been little to no recourse for brokers seeking to rid their records of claims that may not be factually impossible, clearly erroneous, or false, but may still be improper nonetheless.

According to a recent decision by a California Court of Appeal, though, brokers seeking to keep their records accurate and clean are not necessarily limited to the slim expungement standards above. Instead, in Lickiss v. Finra, a California court determined that a broker was entitled to seek expungement relief from the court based on what is known as the court's inherent powers of equity, or, in other words, basic principles of fairness. In that case, financial advisor Edwin Lickiss filed an action in a California state court to expunge his CRD of 17 past customer complaints and a regulatory action, all of which were filed between 1991 and 1996. Lickiss argued that the court should order his CRD expunged because, among other things, the complaints were ancient, his record had been clean ever since, and the claims largely resulted from Commonwealth Equity Trust's 1993 bankruptcy, over which Lickiss had no control or influence. He additionally argued that the court should order his record expunged on account of the fact that he suffers professional and financial hardship based on the disclosures of these complaints because his current and potential clients increasingly use the Internet to obtain his BrokerCheck history.

In terms of legal grounds, Lickiss made two arguments: Finra Rule 2080 and the court's "equitable and inherent power" to grant expungements. In essence, a court's inherent "equitable powers" boil down to the court's fundamental authority to make decisions based on overall principles of fairness. In the Lickiss' case, the court had to weigh the benefit of expunging outdated and potentially misleading complaint information from Lickiss' CRD against any disadvantages that non-disclosure of complaints on BrokerCheck posed to the public, or others.

Instead of using its inherent authority to consider the competing interests in Lickiss' case as he had requested, however, the trial court considered Lickiss' claim only within the confines of the limited categories set forth in Rule 2080 above. Finding that Lickiss' request for his record to be expunged did not squarely fall squarely within this stringent criteria, the court refused to grant the request.

Undeterred, Lickiss appealed the lower court's decision and won. The appellate court found that the lower court was mistaken in only examining the Rule 2080 criteria, and instead, should have also considered Lickiss' claims in the context of the court's inherent "equitable powers" to grant expungement. While the court did not say that expungement would ultimately be warranted in Lickiss' case, its decision arguably opens the door for brokers to seek the court's assistance in removing unwanted allegations and complaints that may fall outside the scope of Rule 2080.

In light of the Lickiss decision, Finra's increased disclosure requirements and promotion of expanded investor awareness relating to BrokerCheck may prove to be beneficial for financial advisors who are eager to keep their records accurate and clean. There is no question that over the past few years, the amount of information available on BrokerCheck has dramatically increased. In 2010, for example, Finra eliminated age restrictions on historic complaints, resulting in the disclosure of all complaints that became non-reportable after the implementation of Web CRD-on or after August 15, 1999. Further, Finra's desire to make BrokerCheck access even more widespread among the public became clear earlier this year when Finra requested comments for ways to aid and increase its use by investors. More recently, in September 2012, the Finra Board of Governors authorized the filing of proposed rule amendments to the SEC. These proposed amendments seek to require member firms to include a reference and link to BrokerCheck not only on their own Web sites, but also on certain Web sites maintained by or on behalf of associated persons. The amendments further seek to have BrokerCheck permanently include publicly available information about investment-related civil actions brought by a state or regulatory authority that have been dismissed pursuant to a settlement agreement.

As a result of investors' increasing use of Internet resources, the information reported on BrokerCheck-whether warranted or not-will only become magnified in the public arena under Finra's new and proposed regulations. Brokers thus may increasingly face the loss of existing clients, prospective clients, or potential employment opportunities as a result of the heightened advertising of BrokerCheck and the customer complaint disclosures therein. While this certainly impacts all financial advisors, brokers with inaccurate or otherwise unjustified complaints on their record especially face the potential of unfair professional or financial hardships resulting from Finra's recently promoted policies.

To be clear, the Lickiss case does not guarantee that all brokers who seek the court's equitable assistance for expungement will be successful. What Lickiss does seem to guarantee, however, is that when a financial advisor seeks expungement relief based on the court's powers of equity, the court must look beyond the confines of Rule 2080 and evaluate competing concerns with the goal of reaching a fair result. Avoidance of unfair hardships resulting from increased investor access to complaint information is a strong concern for brokers that can and should be considered by the court, and Finra's new and proposed regulations may just provide brokers with an edge in the competition of fairness for expungement.

Joelle A. Simms is an attorney in the Securities and Insurance Law practice groups of Bressler, Amery & Ross. Her securities practice focuses on representing broker-dealers and registered representatives in customer dispute arbitrations before the Financial Industry Regulatory Authority (Finra). Joelle can be reached at 954-430-7834 or by email, [email protected]